Analysis: Toshiba repositioning with SanDisk buyout

Oct. 20, 2008 – Toshiba’s purchase of extra capacity from flash memory JV partner SanDisk is likely a move to protect its investment given M&A overtures by market-leading Samsung, though the rumored price for the deal is a bit tough to swallow in current economic times, according to analysts.

The popular school of thought is that the deal, under which Toshiba buys 30% of SanDisk’s share in the JV’s Fab 3 and Fab 4 capacity, gives SanDisk some cash (~$1B, including reduced equipment lease costs) with which to reinvest in its depressed stock, driving it back to levels from before Samsung’s takeover bid (seen as somewhat lowball by many Wall Street watchers, who assumed some greater valuation of SanDisk’s patent leverage than a ~25% premium at the time). With SanDisk shares dropping in the past week to ~$14, that suggests investors are betting Toshiba’s move will further discourage Samsung, so they are driving the price back to pre-offer levels (which would also facilitate a share buyback), notes Jim Handy with Objective Analysis. “SanDisk could use this measure to help thwart Samsung’s takeover bid, remaining independent until 2009’s NAND recovery drives its stock back to record levels.”

Toshiba itself has openly denied an interest in making a M&A offer for its JV partner; “this move appears to be the company’s alternative,” Handy writes in a research note.

The pricetag of this deal is reportedly well over ¥100B (US $982M), or more than a third of Toshiba’s cash position. The company is already expected to post as much as ¥30B-¥50B (~300M-$500M) in losses this quarter, its first in five years. “Like most of the other memory suppliers, Toshiba’s cash position is not very strong at this time,” noted iSuppli’s Nam Hyung Kim, director and chief analyst for the memory segment. “If they continue to burn $1B cash per quarter, they need to raise money from its available credit line in near future.” And now is not a good time for most companies to beat the bushes for new credit.

But Japanese paper Nikkei reports that Toshiba is mulling a plan to pay for the tools over time to a leasing-agent middleman to keep initial costs low. And Handy points out that memory sales account for <9% of the Toshiba conglomerate's overall FY08 sales, so it is less negatively exposed to the segment than others and should more easily be able to come up with funds internally.


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